Yahoo Finance Here's What's Concerning About PNM Resources' (NYSE:PNM) Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at PNM Resources (NYSE:PNM) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for PNM Resources:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = US$211m ÷ (US$10b - US$1.1b) (Based on the trailing twelve months to March 2024).
Thus, PNM Resources has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 4.8%.
Check out our latest analysis for PNM Resources
Above you can see how the current ROCE for PNM Resources compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for PNM Resources .
The Trend Of ROCE
On the surface, the trend of ROCE at PNM Resources doesn't inspire confidence. Around five years ago the returns on capital were 3.4%, but since then they've fallen to 2.3%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
Our Take On PNM Resources' ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for PNM Resources have fallen, meanwhile the business is employing more capital than it was five years ago. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One final note, you should learn about the 5 warning signs we've spotted with PNM Resources (including 2 which are significant) .
While PNM Resources may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
